At this time in the economic cycle, we have a problem of high unemployment and low real economic growth. The Republicans in Congress won’t allow us to use the tools that the government has to fix the problem we have at this time because they are worried about a problem that we do not have at this time.
The tool that the Republicans won’t let us use is called fiscal stimulus. Government fiscal stimulus means that government spends money to buy goods and services in order to replace the demand in the economy that individuals and individual corporations cannot create. This is different from the tool that the Federal Reserve has which is called monetary stimulus. Monetary stimulus means that the Fed pumps liquidity (money) into the economy in the hope that individuals and individual corporations will spend the money to create the economic demand that is missing. What excess monetary stimulus produces at this time is a bubble in the stock market. This is not real economic growth, as much as I personally benefit from it.
At this time, monetary stimulus is not the most effective tool to use. With high unemployment and lack of demand and the corporations swimming in excess cash, there are no demand stimulating investments for corporations to make. People who fear unemployment and whose asset values (homes) have declined, are not in a position to spend enough money buying goods to lower unemployment. The only sensible thing for individuals to do is to hunker down, save money, and cut personal debt. If enough people do this at this time and there is no countervailing force from government, the economy will nose dive. Remember that the student and former student loan debt is a very strong component of the problem that Elizabeth Warren proposes to fix at this time.
There is a very important reason why I have emphasized the phrase at this time. The Republicans accuse Democrats of always wanting to spend. This is not the case as can clearly be seen with Bill Clinton’s massive deficit reductions at his time. The prescription to fix what ails the economy at another time will be different from the prescription to fix what ails us at this time.
Republican business people who want to get into government claim that they know how to create jobs to lower unemployment because of their business experience. The trouble with this claim is that the tools that a business uses to create jobs in an individual corporation are nothing like the fiscal policy tool that the government has at its disposal. Business people who do not recognize this difference pose an immediate threat to our economy at this time. These people also ought to understand that the major goal of a corporation is quite different from the major goal of the federal government. The major goal of a corporation, and rightly so, is to make a profit for its investors. The major goal of the government is to see that we have a smoothly running society where just about everyone can live a reasonably comfortable life style.
If there is one thing to remember from this post is that in economic policy timing is everything. Don’t be fooled by so-called experts who have only one prescription for all economic ailments at all times.